Crude oil trading outlook: futures set for seventh weekly loss on supply glut, demand prospects

West Texas Intermediate and Brent crude were on track to post a seventh weekly decline as OPEC members showed no signs of curbing production, while another set of poor economic data from China fanned negative sentiment for demand from the worlds top energy consumer. Support was drawn by signs of US economic strength and amid speculations that production growth in the US will slow as it becomes economically inefficient for some producers to operate.

US crude for delivery in February traded 0.39% higher at $48.98 per barrel at 8:42 GMT, having shifted in a daily range of $49.61-$48.86 a barrel. The contract rose 0.29% on Thursday to $48.79, rebounding from Wednesdays low of $46.83, the weakest level since April 2009.

Meanwhile on the ICE, Brent for delivery in the same month stood at $50.85, down 0.22% on the day. Prices ranged between $51.44 and $50.82. The contract slid 0.37% yesterday to $50.96, narrowing its premium to WTI to $2.17. The gap narrowed to $1.87 on Friday.

Oil prices have fallen by more than 50% since a June peak amid worries that slowing global growth would fail to soak rising oil supply as major producers pump near the highest level in decades.

US crude production surged to 9.14 million barrels per day in the week ended December 12th and has remained an inch below that level ever since. Domestic output has risen by 66% in the past five years as new technology allowed for reserves in shale rock to be tapped, with major oil companies calling for the removal of a 40-year old ban on most US crude exports as the country becomes increasingly well-supplied and self-sustainable.

Meanwhile, OPEC remains in defensive stance, showing no signs of willingness to cut production in order to defend market share. The group reached a collective decision on November 27th in Vienna to leave its 30-million-bpd quota unchanged, with member countries attributing the global supply-demand imbalance to the US shale oil boom.

Yousef Al Otaiba, the U.A.E.s ambassador to the US, said: “This extra glut in the market is not coming from the OPEC members, so therefore why should the OPEC members have to cut their production?”. He added that his country does not intend to cut output no matter where prices bottom. According to estimates by Qatar, the market is swimming in an oversupply of 2 million barrels per day, which will persist throughout this year.

US production growth

However, with prices having fallen by more than half, it becomes economically inefficient for some US producers with higher production costs to maintain full operational capacity. Bloomberg reported that Helmerich & Payne Inc., the biggest rig operator in the US, had received early termination notices for four contracts, while Pioneer Energy Services Corp. said four rigs have been canceled early. According to Bloomberg, producers may terminate early an additional 50-60 agreements.

Output growth in the US may be 800 000 barrels lower than previously estimated in 2016, David Hewitt, the co-head of global oil and gas equity research at Credit Suisse said earlier in the week. The bank had previously projected US producers to pump 1.3 million barrels per day more in 2015 and an additional 1.4 million bpd in 2016.

A brighter US economy outlook also provided some support for the market. Data by Automatic Data Processing showed that private US non-farm employers added 241 000 jobs in December, compared to projections for 226 000, while November’s reading was revised up to show a 227 000 gain.

Market players will be eyeing todays all-important Decembers jobs report, released by the Labor Department. Non-farm payrolls are expected to come in at 240 000 in December after a jump to 321 000 in November. If confirmed, this would be the 11th straight month of job growth above 200 000, while the unemployment rate likely slid to a new multi-year low.

Minutes from FOMCs December meeting showed that policy makers were optimistic about the pace of US economic recovery, but they were unlikely to begin raising interest rates at least for their next couple of meetings, i.e. before April 28-29. Officials dropped the “considerable time” phrase referring to when the central bank will move to hike borrowing costs, replacing it with a “patient” expression which suggested a lift-off at some point in 2015 amid strong consumer confidence and payroll gains.

China

Another set of subpar economic data from China fanned negative sentiment for demand outlook from the worlds second-biggest oil consumer. The National Bureau of Statistics reported that consumer prices rose by an annualized 1.5% in December from 1.4% a month earlier, which was the lowest in five years. Producer deflation worsened, with the Producer Price Index tumbling by an annual rate of 3.3%, compared to projections for -3.1% and -2.7% in November. This was the worst reading since September 2012.

According to BNP Paribas, Brent will average $60 per barrel in 2015, compared to a November forecast for $77, while West Texas Intermediate crude will average $55, down from the previously predicted $70.

Pivot points

According to Binary Tribune’s daily analysis, West Texas Intermediate February futures’ central pivot point is at $48.72. In case the contract breaches the first resistance level at $49.72, it may rise to $50.64. Should the second key resistance be broken, the US benchmark may attempt to advance $51.64.

If the contract manages to breach the first key support at $47.80, it might come to test $46.80. With this second support broken, movement to the downside could continue to $45.88.

Meanwhile, February Brent’s central pivot point is projected at $50.89. The contract will see its first resistance level at $51.98. If breached, it may rise and test $52.99. In case the second key resistance is broken, the European crude benchmark may attempt to advance $54.08.

If Brent manages to penetrate the S1 level at $49.88, it could continue down to test $48.79. With the second support broken, downside movement may extend to $47.78 per barrel.